What a factor rate actually is
A factor rate is a simple multiplier on the amount advanced:
total payback = advance × factor rate
Take $100,000 at a 1.35 factor: you owe $135,000. That's the entire formula. Notice what's missing — time. Whether you repay over six months or eighteen, the dollar cost is the same $35,000. An interest rate is a price per year; a factor rate is a price, full stop.
Why that makes "35%" wildly misleading
Paying $35,000 to use $100,000 would be a 35% annual rate only if you kept all $100,000 for a full year and repaid it in one piece. A merchant cash advance works the opposite way: daily withdrawals start immediately, so your average outstanding balance is roughly half the advance, held for less than a year. Same $35,000 fee, half the money, three-quarters of the time — the effective APR roughly triples the sticker number.
Conversion table
Approximate effective APRs for a daily-payment advance, by factor rate and payback period:
| Factor rate | 6-month payback | 9-month payback | 12-month payback |
|---|---|---|---|
| 1.15 | ~55% | ~37% | ~28% |
| 1.25 | ~90% | ~61% | ~46% |
| 1.35 | ~125% | ~85% | ~64% |
| 1.45 | ~160% | ~108% | ~81% |
Two things jump out. First, shorter payback means a higher APR for the same factor — you're paying the same fee for less time with the money. Second, even the "cheap" corner of this table costs more than almost any bank product. Upfront fees deducted from the advance push every number higher still.
The trap inside "early payoff"
On an amortizing loan, paying early cuts interest. On most factor-rate products the payback is contractually fixed — settle in month three and you still owe the full $135,000. Early payoff doesn't save money; it just compresses the same fee into less time, which raises the effective APR. Some providers offer prepayment discounts; if yours does, get the schedule in writing.
The fix takes one calculation
Before signing anything quoted as a factor rate, convert it: net funds after fees, payment amount, payment count — and solve for the annualized rate. That's exactly what the free calculator does in your browser. If the lender objects to you knowing the APR, that is itself the answer.
Convert any offer in 30 seconds
The free true-cost calculator turns any payment schedule into an effective APR and total cost of capital. The $29 workbook compares up to five offers side by side, with amortization and cash-flow impact.
Free True Cost Calculator Full Workbook — $29Educational content — not financial advice. APR figures are approximations for comparison; verify against your actual contract disclosures.